HOW MUCH FOR A HAPPY RETIREMENT?

TODAY’S BLOG

HOW MUCH FOR A HAPPY RETIREMENT?

Doubtless your will have heard of Which? Magazine. They conducted a survey recently in an attempt to understand how much is really enough for people to have a comfortable retirement. They concluded that a two-person household needs an average annual income of £26,000 for a comfortable retirement.

However you have coped with the pandemic, many people have not been able to spend money in the way they normally would. Many have saved the sums that would have been spent on holidays, travel, commuting, work clothes, weekday lunches, meals out and so on. This has given many of us the opportunity to pause for thought and reflect on how much we spend and the lifestyles we lead.

Some people have elected to retire earlier than they had planned, some have had this forced upon them. In practice, the warning signs for higher unemployment have been around for some time. We shall all begin to see the reality of things once the lockdown ends properly and the furlough system comes to an end. I do not see this going well. I implied, no… I stated that the Budget in March worked on the assumption of unemployment rising by 500,000 over the next 2 years with the largest increase in the current 2021/22 tax year.

£26,000 OR £19,000

Anyway, many have been giving thought to how much income they are likely to need when they stop earning. In February, Which? asked around 7,000 retirees about their spending.

The findings can be used as a guide to how much people are likely to spend and how much they might need to save, factoring in the state pension and tax bills. Couples need a pot of around £155,000 alongside their state pension to produce the annual income for a comfortable retirement of £26,000 via pension drawdown – or just over £265,000 through a joint-life annuity. Two-person households would need around £442,000 in a drawdown plan to fund the luxury retirement target (£41,000 per year) – or £589,000 if they’ve taken the full 25% tax-free lump sum available at the outset. If you opt for the guaranteed income provided by a joint-life annuity, you’ll require an initial fund of around £757,000.

For single-person households, achieving a comfortable retirement would mean a pot of around £192,290 alongside the state pension to get to an annual income of £19,000 via pension drawdown, or £305,710 through an annuity. For a retirement at the ‘essential’ level, single-person households would need £77,350 in a pension drawdown or £123,365 to buy an annuity plan to meet an annual target income of £13,000. A couple receiving the current average amount of £155 each per week will get just over £16,000 a year to add to private pensions. Pension drawdown figures are based on the savers withdrawing all of their income over 20 years from the age of 65, with investment growth of 3%, inflation at 1% and charges levied at 0.75%.

TWADDLE – THAT THING ABOUT ASSUMPTIONS

So let me respond by clearly saying “twaddle!” but it’s a helpful guide.That is all it is, there are huge holes in the assumptions and thinking, for starters, assuming a 2 decade retirement. Life rarely happens so “neatly”.

Over the years our processes have evolved with the technology that is available. We stress test your financial plan each week. Considering the likelihood of your life expectancy to the tenth percentile… which means the 1 in 10 chance you live a really long time. We consider sustainable income levels that fluctuate with inflation and changing investment returns based upon historical facts rather than regulatory unicorn utopias.

In any event, why would you care about a survey where your lifestyle is dictated? Surely your financial plan should be about protecting and ensuring that your current lifestyle endures as long as you do…. Or do you want less?

That’s why it is important, no – why its vital to have your own plan, based on sensible assumptions that we review together. Unless you have some mind-blowing news for me, you get one life and the clock is ticking. So have your own plan, know what you want and check with us that you are on track.

Need help? Know someone that does? get in touch... share the truth. It won’t hurt.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

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GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

HOW MUCH FOR A HAPPY RETIREMENT?Dominic2023-12-01T12:13:06+00:00

Dispatches: How to Blow Your Pension

Last night Channel 4 showed a 30 minute programme called “How to Blow Your Pension”. The premise being that the new pension rules might result in thousands of “pensioners” cashing in their pension pots, blowing the lot only to run out of money. You can see the show on the 4OD website should you wish to. The intention was good, but the execution rather miserable and once again missing the opportunity to educate people and whilst Michael Buerk had a good reputation as a BBC newsreader, clearly he doesn’t appreciate that a document from a pension provider is not actually advice – but information about options. Frankly it isn’t that much of a jungle out there, but you will need proper advice, this is not the time to become a DIY internet “expert” it has to work and last. Just because someone has teeth that they care for, doesn’t mean that they should do their own dentistry. Just because you earn, handle and spend money does not make you best placed to do a proper job of planning and generating income for the rest of your life… So I thought I’d have a go at explaining the issues.

New Pension Rules – Simple

Pension rules are changing, from April 6th 2015 anyone aged 55 will be able to access their entire investment based pension pot should they wish to. There will be no compulsion to buy an annuity (an income for life). The principles have not changed – in that 25% of the pot is treated as tax free and the remainder is treated as income when you take it, however you take it – and so subject to income tax at your relevant rate of tax. You can still buy annuities should you want to. That’s it.

Running out of Money

The difficulty is that for most people their pension needs to last as long as they do…. ideally a bit longer if they have a spouse that outlives them too. So in practice you need to be careful about how much you take, its got to last and once its gone, its gone. So you have to guess how long you and your spouse might live (clue – actuaries do this for a living and designed annuities).

Make a Plan

So you will also need to reflect on how much income you need, what plans you have and it would be sensible to allow for some unexpected costs. You may need to pay for your own care or medical treatment – if you wish to choose how this is provided to you. You will also need to reflect on the impact of inflation, which at the moment is at record lows – but do the things you pay for really have such a low rate of inflation? and making a guess now for the next 20, 30 or perhpas 40 years of retirement needs some proper thought. If you don’t buy an annuity (which for many will be a very sensible option) the fund will need to grow (just to stand still and keep pace with inflation at the very least) – so how much investment risk is appropriate? what returns do you really need? what happens if these aren’t achieved? how will the portfolio be looked after? … and so on.

Review the Plan

As a result of these new “freedoms” (which some already enjoy anyway) you have a plethora of choices and the truth is that these need to be reviewed – in fact thats the beauty of it all, you get to alter your decisions (unlike simply buying an annuity and having to live with the consequences for the remainder of your life). The ability to access the money means that the crooks are on the scent… be it “pension liberation” or rubbishy investments that aren’t regulated and promise more than they could ever deliver. An independent financial adviser can sort the wheat from the chaff, but a financial planner, will do that and also help you plan your income requirements to suit your unique requirements.

Was that really so hard?

Dominic Thomas

Dispatches: How to Blow Your PensionDominic2025-01-21T15:51:07+00:00

What is the best way to save for retirement? Part 2

This is the second in the series “What is the best way to save for retirement?”

The Alternatives to the Big Annuity Gamble

Thanks to some new(ish) rules, you don’t have to buy an annuity. In fact to be clear, just because your pension is set to mature at 60 or 65, does not mean that you have to take it then anyway. You can decide to take money out of your pension from the age of 55. Doing so beforehand will break the pension rules and get you into serious problems with HMRC. So don’t be tempted by firms promising “pension release” or “pension liberation” this is a load of rubbish and you are being lied to, it’s a scam to get money out of your pocket (or rather pension pot).

Delayed gratification

Ok, so you could defer taking the annuity. Why would you? Well because you reckon you don’t need the money now and annuity rates should rise the older you get (because you have left time to live). This is a truism. True in theory, but in practice over the last 20 years annuity rates have fallen from around 15% to around 5% for a variety of reasons which I won’t bore you with (you and I cannot do anything about it anyhow).

Have your cake and eat it..

You could phase your retirement, taking a slice of the pot (much like cutting a cake). As before, 25% of the slice will be tax free, the remainder is used to buy an annuity. The balance (rest of the cake) remains invested and hopefully growing. You can take slices gradually, or just take the balance when you want, same principles applying. Why do this? Well you might be gradually stopping work and want to plan how you take your income and in particular how your income is taxed – so it can be a helpful tax planning tool.

Drawing what you want

Another option is to go into “DrawDown”. This is where you can take the tax free cash bit, and then income. The balance is left invested. Not much different from phased retirement, but meaning that you could take all of the tax free cash now. The amount of income you can take is restricted based upon, wait for it, quango speak coming “GAD rates” this is a rate set by the Government Actuarial Department, who figure out a rate for everyone. It changes, but its not far off the same as an annuity. Alternatively, if you are lucky enough to have guaranteed income of £20,000 from pension sources, then you can do whatever you like with the balance of the pot, take it all out at once, or over the rest of your life. You have to prove you have £20,000 a year mind you. Once its gone..well its gone. This is a really useful feature, but doesn’t apply to most people (who do not meet the £20,000 a year requirement).

Temporary annuities

A newer and evolving option is temporary annuities. These are really DrawDown pensions, but paying an income for a fixed period, typically 5 years. The remaining fund is invested and usually has a guaranteed level of growth (which means using derivatives) so that you can elect to buy a full annuity or do the same again at the end of the term. I have lots of reservations about anyone in the investment world guaranteeing anything, but it is an option.

Life is like a box of chocolates…

All of these options give you more choices. Invariably you have more control over how and when the income is paid to you. As a result you can do some tax planning to hopefully keep your taxable income within your control. You are also keeping your options open that should your health worsen you could then buy an enhanced annuity, or worse if you die, the balance of the fund is passed along to your spouse or possibly your estate, depending of tax charges being met and some other rather dull criteria that we don’t have time for here.

So these are all options. You aren’t being forced to buy an annuity, you can control the income. Tomorrow I will look at other options to pensions – other ways of investing to achieve the same result, income in retirement.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 2Dominic2023-12-01T12:38:51+00:00